Coordinating a service supply chain

Ford has a new version of its F-150 pick up coming out. That per se isn’t all that exciting to me, but everyone says that thus truck is a big deal because of it represents a shift from steel to aluminum. Here is how Dan Neil put it in the Wall Street Journal (Detroit’s Big Three Are Returning to Excellence, Jan 17).

But now, without further eloquence, the news: Ford changed the game this week when it unveiled its aluminum-intensive pickup truck, the 2015 F-150, that is as much as 700 pounds lighter than a comparable steel-bodied vehicle. In an industry that celebrates the power of small numbers and incremental weight savings, 700 pounds is a staggering figure, and it is weight savings that directly and proportionally improves hauling and towing capacity and fuel economy, which are prime metrics in the truck segment.

Wait, Upper West Sider, don’t rush off to the wine column. To the casual observer, the anticipated 3 mpg (20%) increase gained by Ford’s high-tech “light weighting” (a term of art) may seem marginal, but I assure you it is a figure of immediate and national consequence. … By virtue of the hundreds of millions of miles rolled up by the F-series annually, you are looking at the single biggest real-world advance in fuel economy in any vehicle since the Arab oil embargo.

So all that aluminum gives us a game changer — and not just in the realm of fuel economy. Automotive News reports that it has major implications for Ford dealers and their body shops (Ford dealers will gear up to fix new F-150, Feb 3). Ford’s collision marketing manager (that’s just a great job title) says that 80% of repairs on the new F-150 can be done in a standard body shop but that other 20% is going to require special capabilities — in part because aluminum dust reacts badly with steel parts so aluminum work must be kept physically separate from the rest of the shop. All told, a dealer needs to spend 30 to 50 grand in order to be ready for the F-150.

How is Ford going to make that happen?

In some sense, the Blue Oval is opting for the obvious solution: Ford is opening its wallet.

Ford is trying to encourage dealers to take the plunge by offering a 20 percent discount on equipment purchases up to $10,000. It will pay to train one technician at every dealership.

The rebate expires Oct. 31, so dealers have some time to decide.

About 20 percent of Ford’s roughly 3,100 dealers have body shops. Some may decide they don’t do enough truck repairs to justify the investment.

Ford is not requiring dealers to be certified to make aluminum repairs, but the company is highly recommending certification. By the time the truck launches, Ford expects to have a national network of aluminum-capable repair facilities — both dealers and independent contractors — in place.

This is an interesting supply chain coordination problem. Truck buyers (particularly commercial fleets) care about the total cost of owning a vehicle. That would include the cost of repairing it in the event of an accident as well as the time it takes to get the work done. On top of that, insurance costs will matter. If it is expensive to fix a truck, it is going to be expensive to insure a truck.

Ford then needs to assure there is adequate repair capacity in place but it does not want to be directly in that business. Even if they could spend a ton of cash on the problem, I suspect that Ford does not want to alienate its dealer base by competing with them directly for repairs. Hence, Ford has to convince dealers to invest.

Fortunately for Ford, there is some alignment in incentives. The dealers want to sell these trucks too. Ford then can get a way with subsidizing the investment — not completely footing the bill. There is the question of whether the current policy will generate sufficient geographic coverage. Ford doesn’t need just enough capacity. It needs enough capacity in each market.

The other part of this dynamic is that a subset of dealers is providing a public good. Yes, a dealer that makes the investment is expecting a return but he is also create a positive externality for other dealers in the region. As the article notes, this whole change favors large dealers. A dealership that moves a lot of trucks (one dealer in the article sells north of 5,000 of these a year across several locations) captures more of the overall benefit and can more easily justify the investment.